The euro zone's bailout fund could be empowered to lend troubled countries up to 10 per cent of their GDP as part of what is expected to be decisive action to combat the sovereign debt crisis at an EU summit on Sunday.
The European Financial Stability Facility(EFSF), which has been seeded with €440 billion (Dh2.22 trillion) of funding, has become central to the debate about the response to the debt crisis.
Some politicians in Europe favour vastly expanded powers, but some German legislators have decried such an increase as a drain on the continent's biggest and healthiest economy.
"If you open the door to massive credit facilities of this enormous scale, they'll be tapped," Frank Schaeffler, a member of the party led by Angela Merkel, the German chancellor, told Bloomberg News yesterday. "This is not what we mean by ring-fencing Italy and Spain. How can we create a fund big enough for this? This is surely not in Germany's interest."
All eyes will be on Europe on Sunday, when euro-zone leaders are set to mend their differences and come up with a dramatic solution to the two-year-old debt crisis.
Greece, which has piled up debts worth more than 150 per cent of its GDP, would have already defaulted on its borrowings had it not been for a hastily arranged bailout.
Thousands of protestors poured on to the streets of Athens yesterday ahead of a parliamentary on a fresh set of austerity measures to please the IMF, EU and the European Central Bank (ECB) and secure an additional €8bn of aid next month.
But the main aim now is to prevent the spread of the crisis to bigger economies such as Italy and Spain, which also have immense debts. The plan to let the EFSF lend up to 10 per cent of countries' GDP was described in a set of draft guidelines ahead of the summit, according to Bloomberg.
Markets in Europe edged down after the news, with Germany's Dax index down 0.4 per cent and France's Cac 40 down 0.3 per cent in afternoon trading. Asian shares closed more than 1 per cent lower yesterday.
The dip followed a rise in markets early this week on hope that euro-zone leaders were finally getting a handle on the debt crisis after two years of uncertainty.
"Optimism seen over the last two days with regard to the EU summit appears to be reversing a bit," said Tim Fox, the chief economist at Emirates NBD, in a note yesterday.
The uncertainty in Europe comes as investors take stock of mixed economic indicators globally.
A US labour department report yesterday showed a drop in weekly unemployment benefits claims by 6,000 to 403,000, missing economists' forecasts of a bigger decline.
A new edition of the Federal Reserve's Beige Book, a periodic summary of economic conditions in the US, also had a negative tone, with projections of weaker activity and more uncertainty.
Europe, however, remains by far the global economy's biggest wildcard.
"The euro zone is already heading for recession, and if its public debt and banking crisis is not contained, the rest of the developed world may follow suit," economists at Capital Economics in London said in a report on Wednesday.
* with Bloomberg News
